Korea: Strong activity but geopolitics hurts - ING

The Bank of Korea tightening is probably nearer than we thought some months ago as in spite of the geopolitical risks around the Korean peninsula, the economic newsflow on economic activity continues to be strong, and importantly, combined with some stronger inflation too, explains Rob Carnell, Chief Economist a ING.

Key Quotes

“The rise in inflation (2.6% in August, up from 2.2% in July), cannot really be put down to the KRW, which though volatile, has range-traded since March this year. Food prices have spiked higher as a result of recent extreme weather, and base effects also played a part too. The latest spike is likely to prove short-lived. But even after these effects abate in coming months, inflation will still likely remain at or above 2.0% YoY, not low enough for the BoK to ignore the strong activity backdrop.”

“Given Governor Lee’s comments last week, we doubt any tightening will come soon, and the impact of the geopolitics on sentiment and activity may take some further months for the BoK to weigh up. But tightening is probably nearer than we thought some months ago, and we will be reviewing our forecasts this week with a view to bringing forward our 3Q18 rate hike forecast, perhaps significantly.”

“Strong exports (+17.4% YoY) in August were led by a surge in semiconductor and automobile exports (56.8% YoY and 23.6%, respectively), and strong demand from the US, European and Chinese markets. Imports grew by 14.2% YoY, resulting in a trade surplus of US$7bn (prior 15.5% and US$10.3bn respectively).”